The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs

Overview

For years, retailers have argued that having regularly advertised, deeply discounted prices brings price-oriented customers into their stores but that, over time, these customers convert to regular, profitable customers.

Research done by the Retail Strategy Center Inc. based in Greenville, South Carolina, shows that this widely held belief is a myth=? . A handful of these customers do convert into “good” regular customers, but the majority actually defect within twelve months of their first shopping visit. I have yet to find a retailer anywhere in the world whose investment in this type of shopper has yielded an attractive return on investment.

Brian Woolf, Customer Specific Marketing

Most companies are set up for customer acquisition. Few are set up for customer retention. Yet, as you can tell from reading this book, retention is almost always more profitable than acquisition. Most companies lose money on the first sale to a customer. The profits they make are derived from the second and subsequent sales. Does that mean that companies can ignore acquisition? No. It means that acquisition should be conducted with long-term retention in mind.

Frederick Reichheld, in his book The Loyalty Effect, which I cannot praise too highly, points out that the method a company uses to acquire customers often determines whether the company will be successful in the long run. Deep discounts, for example, do not create loyalty. They cheapen the image of the brand, cost you valuable margin, and focus the customer’s attention on the wrong thing: the price of the product instead of its quality and the service you offer.

Finally, we cannot assume that every acquired customer is good for the firm. Fleet Bank discovered that half the customers it was acquiring destroyed value and would never be profitable for the bank.

There are dozens of acquisition methods, several of which are covered in case studies in this chapter. In general we can summarize them as follows:

• Mass marketing through TV, radio, and print ads. With general-use products and packaged goods, mass marketing is far preferable to direct marketing for customer acquisition. Of course, to acquire customers through mass marketing, you have to have a method of capturing customers’ names, addresses, and email names when they buy in retail stores. Without this step, you have sold product, but you have not acquired a customer.

• Creating profiles of your existing customers, then renting names of prospects who resemble your profitable customers.

• Exchanging customer names with other businesses. The catalog industry uses this idea extensively. It works very well. This is contrary to the idea that is prevalent in the rest of the world, particularly Europe and Japan, that customer names are a corporate asset that could be ruined if the company were to allow them to become known to any outsider. Renting customer names has become a profit center in many companies and, as such, is a positive good to the direct marketing industry.

• Providing a method by which customers can register with you when they buy a product. This is done for computers and software and for many electrical products. Millions of people willingly register. The best method in use today for getting people to register is through a Web microsite that you set up specifically for this purpose. The site should be listed on the product packaging or on the product itself. Providing a reward helps.

• Determining which clusters your consumer customers come from and seeking additional customers in other households located in those clusters.

• Doing penetration analysis by zip code or SIC code and finding out where you are strong and where you are weak. Armed with this knowledge, you can better direct your acquisition strategy. It is easier to sell in areas where your name is a household word than in areas where you are unknown.

• Giving customers an incentive to provide you with referrals. As we will show you, referred customers are better than the average customer and are worth cultivating.